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They launched a $1 billion startup together. Then they broke up. How the relationship between Modern Health's cofounders died.

Published by Business Insider on Tue, 23 Feb 2021

<p><img class="lead-image-large" src="https://static1.businessinsider.com/image/6024707ecca90200129b7a62-2400/modern health cofounder breakup 2x1.png" border="0" alt="modern health cofounder breakup 2x1" data-mce-source="Modern Health; Samantha Lee/Insider"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>In September 2019, Erica Johnson was called into a meeting at Kleiner Perkins. Inside, Mamoon Hamid booked a conference room and prepared to have an uncomfortable conversation.</p><p>Hamid is one of Kleiner's partners and was the only outside board member in Johnson's mental health startup, Modern Health.&nbsp;&nbsp;</p><p>That day, he found himself wedged between Johnson and her business partner, Alyson Watson. The young cofounders had been drifting apart for months, and their disagreements had begun to threaten the promising but fledgling two-year-old startup.</p><p>Watson wanted a higher stake and felt Johnson wasn't pulling her weight. Johnson wrote Hamid a five-page letter that questioned Watson's leadership style.</p><p>As Johnson recalled to Insider, Hamid glanced at his watch, looked up, then told her there was someone outside she needed to meet: Modern Health's new corporate lawyer.</p><p>Johnson felt she was about to be fired from the company she helped create. She refused to see the lawyer and instead stood up, shook Hamid's hand goodbye, and said, "I'm incredibly disappointed by this outcome," she told Insider.</p><p>Within a few hours, Johnson says she was locked out of her company email.</p><p>Seventeen months later, dismissing Johnson has had no apparent effect on Modern Health. The company closed a $74 million round of financing in February at a $1.17 billion valuation. It sells mental health services as an employee benefit, a <a href="https://www.businessinsider.com/these-are-the-6-mental-health-startups-setting-fundraising-records-2020-10">business that has boomed</a> in the pandemic as employers look for ways to help workers cope. Modern Health tripled its headcount to 180 people in 2020, and the company says it has grown revenue 25 times since Johnson left.</p><p>But Watson, who is CEO, faces a peculiar liability: a cofounder who has spent the last year and a half trying to get her fired. Following her termination, Johnson sued Watson, Modern Health, and Hamid for wrongful termination, retaliation, defamation, and breach of fiduciary duty.</p><p>From <a href="https://www.businessinsider.com/snapchat-lawsuit-video-depositions-2013-11">Snap</a> to Tesla, some of the world's most successful tech companies have survived messy cofounder breakups. <a href="https://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-the-company-2012-5">Facebook's</a> infamous founding and resulting lawsuits became the central plot of a movie.</p><p>Still, a cofounder split doesn't usually end in litigation, executive coaches tell Insider.</p><p>In this case, Modern Health has momentum going for it. The startup took in $170 million from the who's who of Silicon Valley, including Kleiner, Founders Fund, Battery Ventures, actor Jared Leto, and the founders of Okta and StitchFix. Former Twitter CEO Dick Costolo is a board director. And the company was recently <a href="https://fortune.com/best-small-workplaces-bay-area/2021/search/">named a great place to work</a> by Fortune.</p><p>All of which makes Modern Health a compelling case study in how founder relationships die.</p><p>Insider spoke to Johnson as well as six former employees, contractors, and advisors to Modern Health who asked not to be identified because they did not want to hurt their industry reputations. It also reviewed internal documents, including Slack messages, emails, sales pitches, and a 102-page internal investigation into Johnson's claims. John Jersin, who is Johnson's husband and a Modern Health investor and former advisor, also spoke on the record.</p><p>Modern Health declined to make Watson or current employees available for interviews. It described Johnson's allegations as part of a "meritless lawsuit" with "no basis in reality."</p><h2>The founders were strangers with a shared goal</h2><p>The daughter of two physicians, Watson <a href="https://www.saastr.com/evolving-role-ceo/">always knew</a> she would start a healthcare company.</p><p>After college, she left for the promised land of San Francisco. That same month, the digital health startup that hired her laid her off, her boyfriend broke up with her, and her <a href="https://open.spotify.com/episode/0I3bLDcrBsEXdTFInZZEx8">apartment flooded</a>. The rental insurance paid for her to live in a Holiday Inn.</p><p>Watson felt depressed and tried to find a therapist. They either weren't taking new patients or they cost too much. Others never returned her calls, Watson said in an interview with Neil Devani, a Modern Health investor, on his <a href="https://open.spotify.com/episode/0I3bLDcrBsEXdTFInZZEx8">podcast</a> "The Operators."</p><p>Watson <a href="https://techround.co.uk/interviews/interview-with-alyson-friedensohn-ceo-and-founder-of-mental-wellness-platform-modern-health/">said</a>&nbsp;she wouldn't have made it through if not for years of therapy and her support network, and she decided then to start a company for improving access to mental health care.&nbsp;</p><p>But she needed a technical cofounder.</p><p>Johnson was a software engineer and a neuroscientist focused on brain health. She had only worked in university settings when a mutual friend told her about Watson's search.</p><p>The idea of working at a startup appealed to Johnson. It wasn't too dissimilar from academia, she said. A startup needs funding to build a minimum viable product and hire people to iterate and collect data. "They're basically parallel tracks," she said. "One just moves a lot faster."</p><p>They met for coffee near a Barry's Bootcamp studio where Johnson had just finished a class, and Watson made her pitch, Johnson recalled.</p><p>Just a few weeks after that coffee, the women were interviewing at Y Combinator, the venerable startup accelerator. They were accepted into the winter program in late 2017.</p><h2>Johnson feared her cofounder was overpromising</h2><p>Watson was CEO from day one, but the founders treated each other as equals, with the same number of shares and board seats, according to the lawsuit.</p><p>While Johnson focused on product and engineering, Watson went heads down on signing customers. She said on an episode of venture capitalist <a href="https://open.spotify.com/episode/59CaZDthBMCeIW0J9qmK2d">Harry Stebbing's podcast, "The Twenty MinuteVC,"</a> that she sent cold messages on LinkedIn to the heads of human resources at hundreds of startups like Airbnb, Lyft, and Gusto, saying she just wanted to meet to learn their needs and get feedback.</p><p><img src="https://static4.businessinsider.com/image/602ae3ff2edd0f001a8d5d0f-1536/Modern Health office.JPG" border="0" alt="Modern Health office" data-mce-source="Erica Johnson" data-mce-caption="By 2019, Modern Health outgrew its WeWork digs and moved into a bigger office in downtown San Francisco."></p><p>At Y Combinator, it's a biblical principle to <a href="https://www.ycombinator.com/library/4D-yc-s-essential-startup-advice">talk to your users</a> as part of starting a businessand to prioritize meeting customer needs in a company's early days above growth.</p><p>But some former employees and advisors became worried Watson was overstating the company's offerings. Jersin, the investor and advisor who was then dating Johnson, received a text from Watson in early 2018 asking for his advice on how to approach these user meetings. He said he believed she planned to make promises to these potential customers.</p><p>"Thinking they should be pure discovery and understanding if there is something in the space they are looking for...and then we say we can do it," Watson wrote in one text seen by Insider.</p><p>"For sure. Let's talk this weekend!" Jersin said.</p><p>A few months after the accelerator, the company made ambitious promises to Netflix and Cisco, saying it could provide support for employees working in other countries who spoke different languages, according to an email and a sales document seen by Insider. Modern Health had no international support at that time, Johnson said, and today, the website says it supports only <a href="https://www.globenewswire.com/news-release/2020/12/15/2145421/0/en/Modern-Health-Raises-51-Million-at-Valuation-North-of-Half-a-Billion-Dollars.html">35 languages</a>, while it told Cisco its network of providers spoke 50 languages.</p><p>Modern Health landed the Netflix contract. It's unknown if Cisco became a customer.</p><p>In private, Johnson grew worried. Her fear was that her company would bring on a customer and be unable to scale the provider network in time to meet demand from employees. But she said she didn't say anything to investors or the team because she didn't want to hurt the company's credibility.</p><p>"In some ways, it's really rough, it's like a marriage. You have to provide a united front," Johnson said. "And even if you disagree, you can't let your employees and your investors see that."</p><p>In a statement, a company spokesperson referred us to a <a href="https://www.businessinsider.com/modern-health-report-stands-by-ceo-conduct-2020-11">lengthy report</a> produced by a committee of independent board directors that investigated Johnson's allegations after she sued.</p><p>The report, which Insider has seen, said the committee found "no evidence of any customer, patient, or investor being misled" and chalked up Johnson's lawsuit to a "personal vendetta" against Watson.</p><p>For many startups, part of the growth strategy is to employ a "fake it will you make it" attitude to win customers and users. Founders often act more successful than they are to scale from nothing into a viable business. Some might consider this misleading; others call it hustling.</p><p>Modern Health's board investigation did find evidence of Watson not wanting employees to "highlight the company's small size in its early days," according to the report. But it characterized this behavior as "a standard sales strategy rather than a misrepresentation."</p><h2>An injection of venture capital ramped up growth and expectations</h2><p>In fall 2018, Jared Leto came calling. The actor-musician and angel investor learned about Modern Health's work and invited Watson to one of his concerts, she recalled on <a href="https://open.spotify.com/episode/0I3bLDcrBsEXdTFInZZEx8">"The Operators" podcast</a>.</p><p>Backstage, she met Hamid, the Kleiner partner, and gave him an elevator pitch. She explained that Modern Health had built software to sell to businesses so employees could access mental health benefits.</p><p>A person with symptoms of depression or anxiety can talk to a therapist on Modern Health. Others might opt for coaching or group sessions, called "<a href="https://circles.modernhealth.com/">circles</a>." The app also offers meditation and simple exercises that users can complete on smartphones.</p><p><img src="https://static2.businessinsider.com/image/6034086338aa9f00185e0461-1500/modern health slide deck p5.jpg" border="0" alt="modern health slide deck" data-mce-source="Obtained by Insider" data-mce-caption="The company sells mental health services as an employee benefit."></p><p>Hamid had already been thinking about the need for a company like it, Watson said on the podcast. The following spring, Kleiner led the startup's <a href="https://www.prnewswire.com/news-releases/modern-health-raises-a-9m-series-a-round-led-by-kleiner-perkins-300855797.html#:~:text=Modern%20Health%20Raises%20a%20%249M%20Series%20A%20Round%20Led%20by%20Kleiner%20Perkins,-Mamoon%20Hamid%20Joins&amp;text=SAN%20FRANCISCO%2C%20May%2023%2C%202019,also%20participated%20in%20the%20round.">$9 million</a> Series A round.</p><p>Things moved quickly from there. The company, then valued at $35 million, used the funds to hire a salesforce. It signed a number of contracts with big organizations like Pixar, Okta, and Gitlab, increasing the number of covered individuals tenfold in 18 months, according to a <a href="https://www.prnewswire.com/news-releases/modern-health-announces-close-of-31m-series-b-round-300988012.html">press release</a>.</p><p>The startup offered typical employee perks but with a wellness bent, according to a former contractor. On Fridays, it often catered mixed salads for its mostly-vegetarian workers. Employees went to a Mexican beach town on a retreat and enjoyed a $1,500 stipend for mental health services.</p><p>The founders stopped sitting next to each other so they could each be closer to their direct reports, but they kept in lockstep over text and Slack and met on Mondays for sit-down "founder syncs."</p><p>Meanwhile, Watson had started to lean on her cofounder less. She called Hamid to express her frustration, according to the board's report. She said she didn't think Johnson was doing the work of a technical cofounder or adding much value.</p><p>A handful of employees who were interviewed by the board after Johnson's lawsuit said they wondered what Johnson's job was.</p><p>The business was growing, and in the first half of 2019, the company had been forced to delay a couple of key product launches, which was part of Johnson's domain.</p><p>In emails and Slack messages seen by Insider, Watson told Johnson she needed to rely on someone to steer product and engineering. She didn't believe Johnson was writing code or fixing software bugs, and questioned if she even had the tools on her computer to do the work of a chief technology officer, according to an email sent nine months before Johnson's firing.</p><p>In 2019, Johnson moved into another role as chief science officerher third position at the company after she became chief technology officer, then head of product.</p><p><img src="https://static6.businessinsider.com/image/602ae278b3c2a800183ccdf0-2400/Courtesy of Erica Johnson.jpg" border="0" alt="Erica Johnson Modern Health cofounder" data-mce-source="Erica Johnson" data-mce-caption="Erica Johnson is a cofounder of Modern Health."></p><p>Today, Johnson says she never had a conversation about any performance issues in two years of employment. A letter of termination, seen by Insider, didn't give a reason for her firing.</p><p>In a statement, Johnson's legal team said the company is "smearing" her performance in order to distract from having "no good answers to Erica's serious allegations of fraud, unethical behavior, and patient safety."</p><h2>The conversation that killed the relationship between founders</h2><p>By fall 2019, Watson was feeling increasingly harried by the amount of work she was shouldering. She asked for help closing a couple of key hires and setting a strategy for the next fundraise before Johnson left for her wedding and three-week honeymoon with Jersin.</p><p>"I'm going to be a nervous wreck with you gone so would love to get some of the key milestones done with you so I mentally survive while you're out," Watson said in a text seen by Insider.</p><p>The two traveled to Austin for Johnson's bachelorette party in September. The next week, the founders met in the conference room for their weekly "founder sync" as they always did.</p><p>But this time, Watson held her phone in her lap and read from a script, according to Johnson.</p><p>"Please don't interrupt. I just need you to listen," Johnson says Watson told her.</p><p>Watson had talked with Hamid, and they came up with a proposal.</p><p>She suggested a change to the ownership structure of the company that would reflect their contributions, according to a statement she gave to board directors. The stock options that had already vested were theirs to keep, but going forward, the split would go from 50/50 to 65/35.</p><p><img src="https://static1.businessinsider.com/image/6034098abed5c50011a2be38-2400/1_slrdwS07SNzIOEYqMpnuNg.jpg" border="0" alt="modern health ceo cofounder Alyson Friedensohn" data-mce-source="Modern Health" data-mce-caption="Modern Health cofounder and CEO Alyson Friedensohn."></p><p>It's fairly routine for founders to restructure their equity from a 50/50 split as the company ages. They might give up shares to top off the option pool, for example, which gets spread to new hires and investors. Or one cofounder might decide to reduce their own role and relinquish some ownership to make room for a more seasoned boss.</p><p>Still, it's a delicate conversation for any set of founders.</p><p>Equity is not just a part of a founder's compensation, it's a proxy for the value they add and the power they have, said Amy Buechler, a trained psychotherapist and an executive coach. The CEO often has more equity than the other founders, meaning more control.</p><p>"They're going to reach for that weapon, the power they know they have, which is equity, and say, 'I'm going to take this away from you, and I'm going to do it because I have more power than you,'" Buechler said. "It's intimidating. And so of course the other person responds with defensiveness. Or reaches for the power that they have, which is litigation. They have to respond to what they feel is being done to them, and that's where it gets messy."</p><p>Johnson refused to change their equity structure, and the relationship fell apart.</p><p>Shortly after the talk between founders, Johnson went to Hamid to deliver the letter describing her concerns about Watson's management. Hamid assured her he would investigate.</p><p>He spoke to five current and former employees over two days and dismissed the allegations, according to the board's report. Hamid declined to comment through a Kleiner spokesperson.</p><p>That day in September when Hamid asked her to meet with a lawyer was the last time they met.</p><p>Johnson was fired the next day, on her 33rd birthday.</p><h2>The founders go to "divorce" court</h2><p>Founder breakups are not so unusual.</p><p>Executive coaches tell Insider that a startup hires them for one of two reasons: The needs of the organization are outgrowing the founder's skillset, and the founder wants to elevate their leadership prowess. Or, the founders want help working through relationship troubles, says Shir Nir, a coach whose firm, Handel Group, has worked with&nbsp; Sequoia Capital, Greycroft, and DJF.</p><p>Founders who practice having hard conversations are usually able to pull through, Nir said.</p><p>Jen Wolf, a partner at Initialized Capital, who is known internally as the "CEO whisperer," says she tells founders to write their expectations about each other's roles and responsibilities on paper, as a sort of prenup.</p><p>"No matter how good of friends you are, it always comes to a point where there is some misunderstanding," Wolf said. Initialized is not a Modern Health investor or advisor.</p><p>Despite disagreements, there are good reasons for ousted founders to walk away without litigation, Wolf says. A lawsuit could hurt the company's future, meaning the value of the founder's stake also diminishes. The founder might also dream of starting a new business, and they'll want to tap past investors and employees for support.</p><p>Wolf said she tells founders on the outs to "consider their own reputations."</p><p>Johnson knows her reputation is on the line. "It's about doing the right thing," she said.</p><p>Johnson's lawsuit is a little different from a typical cofounder battle, like at Facebook or Snap, where removed founders Eduardo Saverin and Reggie Brown sued for big payouts after the companies they started went supernova. In those cases, some or all of their equity and cofounder titles had been wiped.</p><p>But Johnson is retaining her cofounder status and vested shares. Like Brown and Saverin, she is suing over her termination, but she is also alleging a breach of fiduciary duty, a so-called derivative action that a shareholder brings on behalf of a company. In this case, Johnson is a shareholder arguing that Watson and Hamid failed to act in the best interest of Modern Health.</p><p>To Johnson, it felt like her cofounder was misleading potential customers in order to close deals.</p><p>"This isn't a widget company, this is about healthcare," Johnson said. "Lives are at stake."</p><p>The company vehemently disagrees.</p><p>"The allegations contained in this story are based on a meritless lawsuit brought by a terminated employee who never raised them during her tenure at Modern Health," the company said in a statement. "We are disappointed that she continues to push these inaccuracies both in court and in the media. We strongly deny them and believe her claims have no basis in reality since an independent committee of the board of directors of Modern Health concluded after a comprehensive investigation that the derivative claims lack merit."</p><p>It will be up to the court to decide. Modern Health's founders have a hearing in San Francisco on Thursday to decide how the case moves forward.</p><p>Watson, for her part, is charging ahead. She recently <a href="https://www.bloomberg.com/news/articles/2021-02-11/kleiner-backed-modern-health-valued-at-1-17-billion-after-round">told Bloomberg's Katie Roof</a> she aspires to become&nbsp;the youngest woman to take a company she started public. At 30 years old, she has one year to make it happen, after Whitney Wolfe Herd, who is 31, completed an IPO for her dating startup <a href="https://www.businessinsider.com/bumble-ceo-whitney-wolfe-youngest-female-ceo-ipo-company-public-2021-2">Bumble</a> earlier this month.</p><p>But Wolfe Herd, perhaps, can relate more to Johnson.</p><p>Before Bumble, Wolfe Herd cofounded Tinder and was pushed out. She sued the company and reached a settlement.</p><p><em data-stringify-type="italic">Are you a startup insider with insight to share' Contact </em><em data-stringify-type="italic">Melia Russell</em><em data-stringify-type="italic">&nbsp;via email at&nbsp;</em><em data-stringify-type="italic">mrussell@insider.com</em><em data-stringify-type="italic">&nbsp;or on Signal at (603) 913-3085. Open DMs on Twitter&nbsp;<a href="https://twitter.com/meliarobin" data-analytics-module="body_link" data-analytics-post-depth="100" data-uri="f3a041bb1980b424f1a00124365259b1">@meliarobin</a></em><em data-stringify-type="italic">.</em></p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/rent-runway-ceo-jenn-hyman-profile-during-covid-crisis-2020-9" >Rent the Runway CEO Jennifer Hyman, one of the most successful female founders, is fighting to save her company</a></strong></p><p><a href="https://www.businessinsider.com/modern-health-messy-cofounder-breakup-2021-2#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/what-its-like-to-do-your-own-taxes-for-the-very-first-time-2018-2">July 15 is Tax Dayhere's what it's like to do your own taxes for the very first time</a></p>
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